Economics for the Earth Blog

“Cost-benefit calculation is the highest art form in the realm of persuasion by information — and the most deceitful…In essence, property rights (and profit) are being assigned a higher value than human rights. Human lives are discounted, quite literally, by government economists…”

Ron Kirk, the U.S. Trade Representative, is seeking to negotiate a Trans-Pacific Partnership trade agreement that has the potential to be the most important regional trade pact ever entered into by the United States. When TPP negotiations resume in San Diego on July 2, nine countries will be at the table: Singapore, Malaysia, Chile, New Zealand, Brunei, Australia, Peru, Vietnam and the United States. Japan, Canada, Mexico, the Philippines, and others may soon seek to join.

The leaked draft of the regulatory coherence chapter of the Trans Pacific Partnership trade agreement encourages countries joining the pact to conduct regulatory impact assessments or RIAs when developing regulations which have more than a minimal cost burden on business and the economy. Specifically, cost-benefit analysis to determine the net benefit of environmental regulations is encouraged..

Cost benefit analysis in its pure form generally involves four steps: (1) identifying and quantifying the costs and benefits of a proposed policy; (2) analyzing risks and probabilities of uncertain consequences; (3) discounting for the “time value of money”; and (5) calculating the “ratio of benefits to costs” in order to make a policy recommendation.

The cost of environmental and other government regulations should not and cannot be ignored, but it ought to be viewed with a wider perspective that looks beyond the morals of the marketplace. And, calculations of seemingly definitive “ratios of benefit to costs” should be considered with balanced skepticism. Identifying and quantifying the costs of environmental regulation can be inflated by assumptions, bias of the analyst, and flaws in data gathering. Quantifying the benefits of environmental regulation can be difficult, for example because public health data is not as comprehensively collected as economic data. Or, it can be impossible: an attempt to attribute a price to the intrinsic value of human life, living things and nature itself.

The deregulatory roots of cost-benefit analyses

The RIA scheme in the leaked TPP regulatory coherence chapter and its cost-benefit provisions in particular appear to be modeled, consciously or unconsciously, on Ronald Reagan’s deregulatory policies and his creation by executive order of the Office of Information and Regulatory Affairs (OIRA) in the White House Office of Management and Budget. While the use of cost benefit analysis in civil engineering and other reasonably quantifiable technical decision making processes goes back to at least the 1930s, the most serious abuse of cost-benefit analysis, at least in U.S. environmental policy making, began with Ronald Reagan. Much of Reagan’s deregulatory and anti-environment agenda, including his proposals for cost-benefit analysis, was developed at the Heritage Foundation, a right-wing think tank, and implemented by ideologically-driven OIRA directors such as Christopher C. DeMuth and Wendy Lee Gramm. Their enthusiasm for cost-benefit analysis appeared hard to separate from their anti-environmental politics.

While some might be surprised that a Reaganesque policy on cost benefit analysis and regulatory review is being pursued by the Obama administration in the context of TPP negotiations, the record shows that it is consistent with the moderately conservative views of the President and his closest advisors on trade and regulatory policy, including current OIRA director Cass Sunstein.

Sean Heather, from the U.S. Chamber of Commerce, said, “This landmark executive order recognizes that good regulatory policy supports good trade policy,” and that it will sharpen the Obama administration’s focus on international regulatory cooperation in the Trans Pacific Partnership and similar venues. Public Citizen, a consumer group founded by Ralph Nader, called the executive order a “smokescreen for deregulation.”

The May 1 executive order illustrates the strategic political advantage for the White House of using regulatory coherence schemes, especially those rolled out pursuant to international treaty obligations like the TPP, to achieve deregulatory ends. The executive branch can more often than not act without the need to ask Congress for new legislation.

Finally, of particular concern for environmentalists, the presidential executive order directs Sunstein and the Working Group to focus on trade in emerging technologies, presumably including environmentally-risky nanotechnology and synthetic biology, where the Precautionary Principle should be applied.

Putting a price on the priceless

The Precautionary Principle is a fundamental tenet of environmental regulation. The 1998 Wingspread Statement on the Precautionary Principle provides in part: “When an activity raises threats of harm to the environment or human health, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically.” The precautionary principle should particularly be applied in the face of an immeasurable environmental risk and “inescapably uncertain outcomes.”

An excellent example of an environmental issue involving uncertain outcomes is regulation of synthetic biology. While genetic engineering involves the exchange of genes between species, synthetic biology involves artificially creating new genetic code and inserting it into organisms. Synthetic organisms self-replicate. No one knows how they will interact with naturally occurring organisms or the consequences for the ecosystem as a whole. In response, civil society groups issued a report and policy statement titled the Principles of Oversight of Synthetic Biology. The Principles declare that: “Standard forms of risk assessment and cost-benefit analyses relied on by current biotechnology regulatory approaches are inadequate to guarantee protection of the public and the environment. The Precautionary Principle is fundamental in protecting the public and our planet from the risks of synthetic biology and its products.”

Finally, cost-benefit analysis generally requires quantifying in monetary terms not only the economic costs of environmental regulations but also the benefits. This leads to the question of how one could possibly assign a value in dollar and cents terms for the benefits of the Endangered Species Act. How does one put a price, discounted to “present value,” on a human life or nature itself? This process inherently gives disproportionate weight to quantitative data and economic costs, while diminishing the perceived importance of qualitative benefits such as saving lives, maintaining the equilibrium of the global eco-system, and protecting wild places

According to Fred Ackerman, an economist at Tufts University, “Cost-benefit analysis requires definite numbers on each side of the balance sheet, to allow the comparison of costs and benefits. Many important questions of environmental policy, however, involve inescapably uncertain outcomes…How much global warming will it take to trigger the irreversible collapse and melting of the Greenland ice sheet?”

As Professor Kelsey explains, “Regulatory impact assessments and cost-benefit analyses are portrayed as objective and benign, but academic studies show they systematically privilege quantifiable economic considerations and interests.”

The real risks, Kelsey says, result from the cross-fertilization of cost benefit analysis (and other RIA “disciplines” in the TPP regulatory coherence chapter) with other chapters of the TPP. For example, the TPP investment chapter would allow foreign investors to sue governments in international arbitration for money damages in compensation for the cost of complying with regulations that reduced their investments’ value or future profitability, based on the evidence provided by the RIA.